ICYMI: 10 Signs of A Market Bubble

Back in February I read an article by John Burns, a very well-regarded, widely-read real estate expert (here is a link to his bio) and I wanted to share it just in case you missed it.

Back in February John wrote one of his annual “Housing Bubble Checkins” where he recalled a project he and 73 other real estate experts completed back in 2013: a list of the top ten signs that a housing bubble is forming.

Fresh on the heels of the last housing crisis, the list reflected a consensus amongst real estate experts using the advantage of 20-20 hindsight. It pointed out many of the excesses that led up to the last housing bubble and broke the down the signs and symptoms into quantitative (things that can be measured by hard numbers) and qualitative (things that describe the situation) categories. The result is an info-graphic that is as true today as it was back in 2013–you can see it below.

Fast forward to February and John Burns notes that we are currently seeing four of the ten qualitative bubble signs forming. Here they are according to Burns:

2. Truck stop feasibility. Our Northern California consultant Dean Wehrli has been doing studies in what the executives called “truck stop” cities, targeting the extreme “drive until you qualify” home buyer.

3. Falling builder stock prices. Home builder stock prices have fallen more than the overall market, with five of the 12 largest builders now trading below book value (what they paid for their assets). While stocks have historically fallen in advance of a downturn, they have also created many, many false alarms, so this is not a sure sign of a downturn.

4. Creative mortgages. We know of one firm that is now making interest-only loans with no FICO score requirements in the San Francisco Bay Area, and we’ve heard of a hedge fund raising $4 billion to provide the 5% retention capital for $80 billion of non-QM mortgages (arguably the new name for subprime). In the last cycle, creative mortgages started as relatively safe risk-adjusted loans but morphed into much higher risk/return ratios in an effort to keep the business growing.

As we move through the final quarter of the year it is important to be mindful of the signs on this list. Some of these may apply locally and some only nationally but in either case we cannot afford to repeat the mistakes of the past. Be vigilant and be realistic!